Chapter 15, Problem 3BPSB

To determine

Answer to Problem 3BPSB

Explanation of Solution

Introduction:

Available-for-sale (AFS) securities are securities/shares which are purchased to earn dividend, interest or to increase fair market value. When these securities are sold in the short term, then they become short term investments else they are considered as long term investments.

To determine:

1. Journal entries to record the transaction and events.
2. A table summarizing (a) total cost, (b) total fair value adjustment and (c) total fair Value.
3. A table summarizing (A) the realized gains and losses, (b) the unrealized gains or losses

Solution:

1. The required journal entries and adjustment entries are shown in the explanation section.
2. The calculation is shown in the explanation section.
3. The calculation is shown in the explanation section

Explanation:

1. The required journal entries and adjustment entries are as follows:

Entries to record purchase of shares:

Date	Particulars	Debit($)	Credit($)
10.03.2015	Long term investment (A)	31400
	Cash (To record shares purchased)		31400
07.04.2015	Long term investment- F Company	57283
	Cash (To record shares purchased)		57283
01.09.2015	Long term investments (M company)	29090
	Cash (To record shares purchased)		29090
02.06.2016	Long term investments- D company	35700
	Cash (Purchase of shares)		35700
14.06.2016	Long term investments (S company)	25480
	Cash (Purchase of shares)		25480
28.01.2016	Long term investment-C company	41480
	Cash (Purchase of shares)		41480
03.09.2016	Long term investments-(M Company)	84780
	Cash (Purchase of shares)		84780

Working notes:
Calculation of Purchases: We use the formula mentioned below:

  $Purchases=\left(Numberofshares*Price/Unit\right)+Commision$

Date	Number of Shares	Price per unit	Commission	Purchases
10.03.2015	1200	$25.50	$800	$31400
07.04.2015	2500	$22.50	$1033	$57283
01.09.2015	600	$47	$890	$29090
02.06.2016	1800	$19.25	$1050	$35700
14.06.2016	1200	$21	$280	$25480
28.01.2016	1000	$40	$1480	$41480
03.09.2016	3000	$28	$780	$84780

The Fair Value adjustment entry is as follows:

Date	Particulars	Debit($)	Credit($)
31.12.2015	Unrealized loss −(Equity)	2873
	Fair Value adjustment-AFS(LT)		2873
31.12.2016	Fair Value Adjustment-AFS(LT)	5093
	Unrealized Loss-Equity		2873
	Unrealized Gain-Equity		2220
31.12.2017	Unrealized Gain-Equity	2220
	Unrealized Loss-Equity	6260
	Fair Value Adjustment −AFS(LT)		8480

Calculation of cost and fair value:

Details	Cost	FV
A	$31400	33000(1200*$27.50)
F	57283	52500(2500*$21)
P	29090	29400(600*$49)
Total	117773	114900

FV Adjustment = Cost- Value

$=\$117773-\$114900=\$2873$

Calculation of cost and fair value:

Details	Cost	FV
A	31400	34800(1200*$29)
D	35700	32400(1800*$18)
S	25480	27600(1200*$23)
Total	92580	94800

Calculation of cost and fair value:

C	41480	48000(1000*$48)
M	84780	72000(3000*$24)
Total	126260	120000

FV Adjustment = Cost- Value

  $=\$126260-\$120000=\$6260$

Calculation of required balance:
FV adjustment= Required balance+ unadjusted balance

  $\begin{array}{l} =\$2220+\$2873=\$5093\hfill \\ =\$6260+\$2220=\$8480\hfill \end{array}$

Entries to record the sale of shares:

Date	Particulars	Debit($)	Credit($)
15.04.2016	Cash	50043
	Loss on sale of Short term investment	7240
	Long term investments(J&J)		57283
27.11.2016	Cash	29755
	Gain on sale of investments		29090
	Long term investments		655
22.08.2016	Cash	23950
	Loss on sale of investments	7450
	Long term investments − S Company		31400
09.10.2016	Cash	28201
	Loss on sale of investments		2721
	Long term investments-AFS Company		25480
31.10.2016	Cash	26102
	Gain on sale of investments		9598
	Long term investment-E Company		35700

Calculation of Sales received from shares:
We use the formula mentioned below:

  $Sales=\left(Numberofshares*Price/Unit\right)-Commision$

Date	Number of Shares	Price/unit	Commission	Sales
15.04.2016	2500	$20.50	$1207	$50043
22.08.2016	1200	$21.50	$1850	$23950
09.10.2016	1200	$24	$599	$28201
31.10.2016	1800	$15	$898	$26102

2. The following table summarizes cost; fair value adjustment and fair value of portfolio on long term AFS at the end of given three years:

Particulars	31.12.2015 ($)	31.12.2016($)	31.12.2017($)
Long term AFS securities (Cost)	117773	92580	126260
Less: Fair Value adjustment	(2873)	2220	(6260)
Long term AFS securities (Fair Value)	114900	94800	120000

3. Statement showing realized and unrealized gains or loss at the end of given three years:

Particulars	2015($)	2016($)	2017($)
Realized Gains(Losses)
Sales of F Shares		(7240)
Sale of P shares		665
Sale of D shares			(9598)
Sale of A Shares			(7450)
Sale of S shares			2721
Total realized Gain(Loss)	0	(6575)	14327
Unrealized gain(Loss)	(2873)	2220	(6260)

The unrealized gain is equal to the fair value adjustment.